Institutional Investors to Reduce Real Estate Investments in 2020

Pension funds, endowments, foundations plan to cut property commitments by 11%.

Institutional investors worldwide are planning on cutting back their investments in real estate by an average of 11% this year, according to a survey conducted by Institutional Real Estate and Kingsley Associates.

The report also found that 40% of institutional investors expect their capital flows to real estate to be lower than last year, and that US-based investors plan to commit $70 billion of new capital to real estate in 2020, down from $75 billion last year.

“Plans for 2020 new capital commitments to real estate are down for both domestic and foreign investors,” Jim Woidat, executive vice president with Kingsley Associates, said in a statement.

The survey focuses on the largest and most influential investors, and responses were collected between Nov. 12 and Feb. 4 from 196 institutional investors, including 129 US-based investors and 67 investors outside the US who represent $8.85 trillion in total assets under management (AUM) and $874 billion in real estate assets.

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The survey was conducted before the coronavirus pandemic hit the global economy and when the stock market had been performing well. However, the survey conductors said it still reflects a late-cycle investment mood and conveys what investors are considering regarding their long-term plans.

Respondents said they expected a real estate return of 8.4% in 2020, up from the 8.1% they had expected in 2019. In comparison, respondents said they projected returns from venture capital/private equity investments of 12% in 2020, up from expectations of 10.7% in 2019, and returns from fixed-income investments of 3.8%.

US investors’ satisfaction with real estate rose modestly in this year’s survey as the share of respondents saying they were “somewhat or very satisfied” increased to 78% in 2020 from 73% in 2019, while those saying they were “very satisfied” increased to 42% from 34%.

Still, investors outside the US said their satisfaction with the sector decreased over the past year as the number of respondents saying they were “very satisfied” fell sharply to 43% from 62%, while the number saying they were “somewhat satisfied” increased to 41% from 22%. But overall the respondents had positive sentiments regarding real estate as Woidat reported less than 10% of the investors said they feel negatively about real estate.

The report noted that over the past few years, investors have underestimated their actual real estate commitments, saying that respondents committed more capital in 2019 than they had initially planned. Actual commitments for US respondents who completed both the 2019 and 2020 surveys were $52.1 billion in 2019, which was 25% higher than the $41.4 billion they said they planned on investing.

Both US and non-US investors rated the US as the most attractive region for investing in real estate. Investors also held positive views about the real estate markets in Northern Europe, Australia, and Japan. By property type, industrial and multifamily were the most attractive sectors, while retail real estate ranked at the bottom among property types.

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